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Terra Firma Capital Partners

PRI reporting framework 2017

You are in Direct – Private Equity » Pre-investment (selection)

Pre-investment (selection)

PE 07. Incorporating ESG issues when selecting investments

07.1. During due-diligence indicate if your organisation typically incorporates ESG issues when selecting private equity investments.

07.2. Describe your organisation's approach to incorporating ESG issues in private equity investment selection.

During the investment selection process, Terra Firma aims to consider all relevant risks and opportunities, including those related to material ESG factors. ESG risks and opportunities are reviewed and assessed alongside the other factors relevant to the specific deal, and ESG assessments are required in investment papers.

Our Responsible Investment Policy requires that ESG factors are identified and assessed when looking at new investment opportunities and we have developed tools to assist in that identification and assessment. It is also common for external experts to be engaged to assess certain areas related to ESG factors.

07.3. Additional information. [Optional]

As a specific example of the consideration of ESG issues during deal processes, during 2015 we worked on a significant potential acquisition in the hotel industry. In line with our standard process the opportunity was initially assessed using our ESG toolkit, designed to aid in the identification of ESG factors. No exclusions or 'red flag' risk indictors were identified, and so the opportunity progressed through the investigation and approval processes. As the project progressed into the due diligence phase, areas which were identified for the sector were refined and external advisors were hired to assist evaluation of property, regulatory and employment conditions. As a result of this work on the identification and quantification of potential impacts, we developed a more accurate view of the risks and opportunities available and we were able to make appropriate changes to our valuation. 

PE 08. Types of ESG information considered in investment selection

8.1. Indicate what type of ESG information your organisation typically considers during your private equity investment selection process.

8.2. Describe how this information is reported to, considered and documented by the Investment Committee or similar.

At each stage in the investment consideration process, the team assessing a potential investment will present their findings to the appropriate committee. In early stages, ESG profiling highlights the likely areas of relevance or any indicators of high risk, and those areas which may require external diligence support. As a project progresses, the team presents all the relevant operational, strategic and financial findings and implications, including those related to ESG matters. In advanced stages, more detailed analysis of specific issues may be required, and an update on the relevant ESG factors is presented, in order to allow the fund General Partners to approve a potential investment.

PE 09. Encouraging improvements in investees

9.1. During deal structuring, indicate if your organisation typically encourages continuous improvements from potential investees with regard to their management of ESG issues.

9.2. Describe the nature of these improvements and their ESG coverage.

Within the portfolio, Terra Firma encourages improvements in strategy-setting and in operational areas, by way of both our approach to active management and the standard Terra Firma governance and monitoring regime.

The nature of improvements varies from investment to investment. A range of potential strategic and operational improvements are likely to be developed during the investment process, and these are refined and augmented throughout the ownership period. Areas where the standard Terra Firma governance approach typically results in changes include corporate governance, reporting/ transparency, monitoring and the delegation of authorities to and from boards of directors.

Terra Firma introduces strong corporate governance frameworks to all new investments, creating boards with executive, non-executive and Terra Firma members, with documented delegations of authority. Boards receive regular and in depth performance reports, which include key non-financial metrics, often relating to ESG factors.

Terra Firma's portfolio businesses provide data to Terra Firma directly, and via board representatives. Where ESG factors are particularly relevant for a specific business, these are reported on more frequently. Terra Firma drives high quality reporting from investees. ESG monitoring is also undertaken throughout the portfolio, primarily through the reporting of annual ESG performance indicators relevant to each investment.

9.3. Additional information.

PE 10. ESG issues impact in selection process

10.1. Indicate how ESG issues impacted your private equity investment selection processes during the reporting year.

10.2. Indicate how ESG issues impacted your private equity investment deal structuring processes during the reporting year.

10.3. Additional information.